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Industry structure and nature of competition

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INDUSTRY STRUCTURE AND NATURE OF COMPETITIONINSTALLED CAPACITYIndia is the world’s second largest cement producing country after China. The industry ischaracterized by a high degree of fragmentation that has created intense competitive pressure onprice realizations. Spread across the length and breadth of the country, there are approximately130 large cement plants owned by around 52 companies and 365 mini-cement plants with aninstalled capacity of around 172.08mtpa as on June 2007. Large cement plants accounted for94% of the total installed capacity in India.CAPACITY CLUSTERSCement and its raw materials namely coal and limestone, are all bulky items that maketransportation difficult and uneconomical. Given this, cement plants are located close to both,sources of raw materials and markets. Most of limestone deposits in India are located in MadhyaPradesh, Rajasthan, Andhra Pradesh, Maharashtra and Gujarat, leading to concentration ofcement units in these states. This has resulted in ‘clusters’. There are eight such clusters in thecountry and account for 81% of the cement capacity. There is a trade-off between proximity tomarkets and proximity to raw materials due to which some cement plants have been set up nearbig markets despite lack of raw materials. GRAPH 4.5

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GRAPH 4.64.8 COST ANALYSISThe energy costs and cement freight costs are the two most important elements in the coststructure of a cement company. While, the share of energy costs has increased marginally,freight cost has experienced a decline in its share of total operating costs. The share of othercosts (such as stores & spares, manufacturing overheads, and administrative expenses) hasdeclined. The share of costs on account of material, repair and maintenance, employees andselling expenses have more or less remained stable.

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GRAPH 4.7Power & FuelThe cement industry is one of the most energy-intensive sectors within the Indian economy.Clinker production is the most energy intensive step, accounting for nearly 75% of the energyused in cement production. In India, an estimated 90-94% of the thermal energy requirement incement manufacturing is met by coal. The remaining is met by fuel oil and high-speed diesel oil.Despite recent increase in coal prices the industry has been able to control the expenditure on thisaccount by investing in captive power plants – freeing themselves from the tariff hike by SEBand reducing the energy consumption required to produce a tonne of cement. However,Government is planning to phase out supplies of subsidized coal to cement, steel and paperindustry. The proposed decision if implemented could result in cost escalation of almost 30-40%,as the prices of coal under auction system are 30-40% higher than the notified prices.COALCoal is an important input in cement manufacture and accounts for 15-20% of the total cost. Coalserves a dual role in cement manufacture. Firstly, the heat value in coal provides the thermalenergy required for the operation of the kiln. Secondly, the mineral content in coal (basically,silica content) acts as a constituent in clinker. Cement accounts for around 4.5% of Indias coaldemand.

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Consumption of coal for production of cement has not increased proportionately with cementproduction because of the switch to the dry process; efficiency improvements in cement kilnsand the increased use of fly ash produced in power plants and granulated slag produced in blastfurnaces of steel plants in the production of cement. However, over the years, there has beendeterioration in the quality of coal. In particular, the ash content has increased implying lowercalorific values for coal, and improper and inefficient burning, etc. Therefore, coal consumptionhas started to increase, resulting in higher fuel and transportation costs. In order to reduce theseproblems, the cement industry started implementing coal washeries, which reduce the ashcontent of the coal at the mine itself. Cement companies are also resorting to importing coal, orusing alternative fuel such as lignite or petcoke.POWERCement is a power intensive industry requiring on an average 90-105 units of power in the wetprocess, and 100-110 units of power in the dry process to produce one tonne of cement produced.Significantly power accounts for 15-20% of the variable cost of cement manufacturing. Cementmanufacturing consumes power mainly for three purposes: raw meal grinding, kiln rotation andclinker grinding. Each stage accounts for roughly one third of the total power consumption. Adry process plant typically has an average connected load of 15 MW. Based on the presentinstalled capacity of 172 mtpa of cement, the total industry requirement is roughly 2520 MW.This is just around 2% of Indias total current power generating capacity.However, with the increase in the frequency of power cuts and rising power tariffs, many cementcompanies are meeting 60-100% of their power requirement through captive facilities. Thecaptive power generation capacity of cement plants is presently estimated at around 1,800 MW.During FY2005, roughly 43% of the total domestic cement production was undertaken usingcaptive power as against only 21% in FY1995. Thus, the share of cement production usingcaptive power has only increased over the years.TRANSPORTATIONOutward freight on cement is an important element in the operating cost of a cement plant. Itaccounts for around one third of the total variable costs. Most of the cement plants in India arelocated in and around the limestone clusters. These clusters are distant from the collieries and the

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markets for cement. Cement has an average lead of around 535 km. Thus, cement companieshave to rely on extensive transportation for moving coal from the coal pitheads to the cementplants and for dispatching cement from the plant to the markets. Both coal and cement are of lowvalue and bulky in nature, freight costs are considerably high for cement plants. Cementcompanies use both road and rail transport to transport cement and to receive coal. Although railtransportation is more economical for distances beyond 250-300 km, cement companies havestarted preferring road transportation even for longer distances because of insufficient wagonsupply to the cement industry. Presently, Rail dispatches amount for about 33% while roadscarry the balance 66%. The balance 1% is accounted by Sea transportation. The share of roadover rail has only gone up over the years. For coal transportation, the dependence on rail networkis still very high and accounts for around 70% of coal movement.Over the past 12-15 months freight cost on cement has jumped more than 20%. This was largelybecause of the Supreme Court ruling that banned overloading of cement trucks. Furtherincreasing diesel haven’t helped the cause. This has induced many cement companies to shift aportion of their cargo to rail. However, with Indian Railways facing shortage of wagons, we doexpect that it will gradually increase freight charges, which in turn could push up the freight costagain.RAW MATERIALSCement is usually used in mortar or concrete. It is mixed with inert material (called aggregate),like sand and coarse rock. Portland cement consists of compounds of lime mixed with oxides likesilica, alumina and iron oxide. There are three major raw materials for cement. A) LIMESTONELimestone is the main raw material and is the source of calcium carbonate. Calcium carbonate isburnt to obtain calcium oxide (CaO). Limestone is the most abundant source of CaO. Cement isthe biggest limestone user in India accounting for over 75-80% of limestone produced in India.The composition of limestone used by the various sectors varies. For cement, the CaO content oflimestone should be a minimum of 44%. Typically, 1.4-1.5 tonnes of limestone are required pertonne of clinker. Thus, for a 1 million tone cement plant, assured availability of cement gradelimestone reserves of the order of 50-60 mt in the close vicinity is important.

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As on 31 March 2006, the countrys estimated gross reserves of cement grade limestone stand at97430 mn.t. Out of total limestone reserves, over 45% of the inventory of cement gradelimestone is in the Southern region, followed by the Northern region with 21.84%, the Westernregion with 12.34% and the Eastern region with 15.82% and rest 3.64% with central region.Andhra Pradesh has the privilege of possessing about 31% of the countrys total proved equilanetreserves of limestone. GRAPH 4.8 B) GYPSUMGypsum is used as a retarding agent. Ground clinker, on contact with water, tends to setinstantaneously because of the very fast reaction between tri-calcium alluminate and water. Inthe presence of gypsum, the desired setting time can be achieved. Gypsum is added to the extentof 5% during the clinker grinding stage. Gypsum is naturally available in abundance inRajasthan, Gujarat and Tamilnadu. C) GRANULATED BLAST FURNACE SLAG (GBFS)The other raw materials that are also used in the manufacture of cement are blast furnace slag (awaste product obtained from iron-smelting furnaces) and flyash (leftover ash from a thermalpower station). Limestone contains about 52% of lime and about 80% of this lime is lost during

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ignition of the raw materials. Similarly, Clay contributes about 57% silica of which about 25% islost during ignition.GBFS is obtained by granulation of slag obtained as a by-product during the manufacture ofsteel. It is a complex calcium aluminum silicate and has latent hydraulic properties. That is whyit is used in the manufacture of Portland blast furnace slag cement.